I was disappointed to read Donald Trump‘s tax plan today. In recent weeks, Trump has been talking a pretty progressive game on taxes. Many of us, myself included, speculated that Trump might be a bit left wing on this issue and might be attempting to shift the Republican Party a to the left on economic issues. Unfortunately, this appears to have been wishful thinking. Trump’s new plan is almost precisely the same as Jeb Bush‘s and Mitt Romney’s. This still puts him to the left of flat tax and fair tax candidates (Carson, Cruz, Paul, Huckabee, Perry, Walker all explicitly endorsed one or both, while Rubio and Kasich have expressed interest in ultimately going to a flat tax), but it puts him to the right of Hillary Clinton and far, far to the right of Bernie Sanders. So let’s talk a bit about how the Romney/Bush/Trump tax plan works, why it’s so disappointing, and what the differences are between the various versions of the plan.
How the Plan Works
This blog started out during the 2012 election and I spent some time covering the Romney tax plan. The Romney plan made several key promises:
- Make permanent, across-the-board 20 percent cut in marginal rates
- Maintain current tax rates on interest, dividends, and capital gains
- Eliminate taxes for taxpayers with AGI below $200,000 on interest, dividends, and capital gains
- Eliminate the Death Tax
- Repeal the Alternative Minimum Tax (AMT)
The Bush tax plan makes similar promises:
- Reduce number of individual income tax brackets from the current seven, ranging from 10 to 39.6 percent, to three — 10, 25, and 28 percent
- Cut the top corporate tax rate to 20 percent, from 35 percent, and also change it to a territorial tax system
- Cap the total value of tax deductions (like the mortgage interest or medical deduction, for example) at 2 percent of a filer’s adjusted gross income
- Nearly double the size of the standard deduction
- Double the earned income tax credit for childless workers
- Eliminate the carried-interest loophole, a provision that allows some fund managers to claim their income as capital gains, giving them a lower rate
Trump’s plan is similar too:
- If you are single and earn less than $25,000, or married and jointly earn less than $50,000, you will not owe any income tax. That removes nearly 75 million households – over 50% – from the income tax rolls. They get a new one page form to send the IRS saying, “I win,” those who would otherwise owe income taxes will save an average of nearly $1,000 each.
- All other Americans will get a simpler tax code with four brackets – 0%, 10%, 20% and 25% – instead of the current seven. This new tax code eliminates the marriage penalty and the Alternative Minimum Tax (AMT) while providing the lowest tax rate since before World War II.
- No business of any size, from a Fortune 500 to a mom and pop shop to a freelancer living job to job, will pay more than 15% of their business income in taxes. This lower rate makes corporate inversions unnecessary by making America’s tax rate one of the best in the world.
- No family will have to pay the death tax. You earned and saved that money for your family, not the government. You paid taxes on it when you earned it.
The key similarity is that all three plans drop the marginal tax rates significantly and purport to make up for these reductions by eliminating loopholes (in policy speak, this is often referred to as “base-broadening”). If we just look at the changes in the marginal rates, these plans look like they will lower tax rates for all taxpayers, but of course any plan that did that could not possibly be revenue neutral. A revenue neutral plan must still deliver the same amount of tax income as the present system. So it is not enough to look at the marginal rates–we also have to consider what loopholes these politicians will close and who will be most severely affected by those closures.
Why This Plan is a Disaster
Trump will tell you that the rich are the primary beneficiaries of tax loopholes, and most people readily believe this, but it’s completely wrong. This is because what republicans call “loopholes” also includes a lot of tax breaks that the government gives everyday people to incentivize various pro-social behaviors.
The Tax Policy Center analysed the revenue that could potentially be raised by “closing loopholes” or “base-broadening”. They also calculated how much additional income Romney’s version of the republican plan would save various income brackets. What they found was that the rich received tax cuts so large under the Romney plan that it would not be possible to make the plan revenue neutral without closing loopholes that predominately favor the poor or the middle class. It also found that the rich stood to gain much more net income from the plan than the middle or the bottom:
Romney specifically promised to preserve a lot of the loopholes that encourage rich people to invest. This meant that his plan would almost exclusively close loopholes that favor the middle or the bottom and result in massive net tax increases on these groups. As TPC put it:
Our major conclusion is that any revenue-neutral individual income tax change that incorporates the features Governor Romney has proposed would provide large tax cuts to high-income households, and increase the tax burdens on middle- and/or lower-income taxpayers.
To put it more specifically:
This means that even if tax expenditures are eliminated in a way designed to make the resulting tax system as progressive as possible, there would still be a shift in the tax burden of roughly $86 billion from those making over $200,000 to those making less than that amount.
The plan lowered taxes on the top 5%, while raising them for the remaining 95%. An annual family income of $200,000 was roughly the dividing line–those under it would have seen a 1.8% fall in their after tax income, while those with children under it would have seen a 3.5% fall (many of the loopholes closed to make it work would have necessarily impacted tax deductions for people with dependents).
Romney and Bush both proposed to bring the top individual rate down to 28%, while Trump promised to bring it down further to 25%. On corporate taxes, Romney wanted to reduce the rate to 25%, while Bush goes for 20% and Trump goes for 15%. This means that Bush and Trump are blowing even larger holes in the federal revenues than Romney did, and Romney’s revenue hole was quite large:
“Revenue lost: law” refers to how much revenue the plan would cost if the Bush tax cuts were kept (for the most part, they were). “Revenue lost: policy” refers to how much revenue the plan would cost if those cuts were scrapped (again, for the most part, they were not). “Revenue gained: Romney” refers to the amount of revenue that Romney would be able to raise with the specific loopholes he had promised to close. The figures showed Romney blowing a hole of at least $360 billion annually, and possibly much more than that depending on how much you believe tax cuts pay for themselves. The Bush and Trump plans are like this but worse for revenue. All three candidates have been extraordinarily vague about what loopholes they intend to close because if they were to get specific, poor and middle class people would recognize the immense burden that these plans covertly impose on them.
A Few Key Differences
In addition to the differences in the marginal rates which make the Bush plan rougher on revenue than Romney’s (and the Trump plan rougher on revenue than Bush’s), there are a few key differences. Bush and Trump have both promised to close carried-interest loophole, which favors hedge fund managers. Romney did not promise to do that. Bush also promised to increase the earned income tax credit, which Romney promised merely to retain. That policy favors the working poor, though it does not help the unemployed. However, because Bush’s corporation rate is lower than Romney’s, it’s unclear that his tax plan would really be any less regressive. Even if we exclude the corporation tax changes, his plan clearly shovels far more money to the rich than to anyone else:
Trump’s plan has a couple differences. For one, Trump promises to remove 75 million people from the federal income tax roll entirely (significantly more than Bush’s 15 million). To do this while simultaneously proposing even lower marginal rates on the rich and on corporations than Bush does will make Trump’s budget hole significantly more difficult to plug. That said, Trump also proposes a one-time corporate wealth tax. He calls for:
A one-time deemed repatriation of corporate cash held overseas at a significantly discounted 10% tax rate, followed by an end to the deferral of taxes on corporate income earned abroad.
Trump has also hinted that he might try to raise money with tariffs on foreign imports. In both of these cases, it’s unclear how much revenue Trump might raise. What is clear is that Trump is promising larger cuts than Bush or Romney, both for the rich and for the everyone else, though it’s still clear that Trump’s plan would more make the income distribution significantly more regressive than it currently is–even though 75 million will be removed from the rolls, the savings for each of these people will still be trivial compared to the savings a rich person will gain from the 25% individual rate, 15% corporate rate, and eliminated estate tax. He will have to raise a lot more money to do all of this than Bush or Romney would need to raise, and even their plans are extremely unrealistic. It’s clear that Trump is trying to pander to everyone, offering a plan that sounds too good to be true because it is–the massive revenue shortfalls the plan would create would need to be made up somehow, and Trump has not given us any details that indicate that he really knows how. He’s trusting that he will be allowed to get away with being vague on the details because Bush and Romney have both consistently gotten away with being every bit as vague.
That said, while all three of these tax plans would devastate revenues and make the income distribution less egalitarian and more regressive, they are all far superior to the flat tax and fair tax proposals we’ve seen from many of the other republican candidates. On economic policy, Trump and Bush are discernibly to the right of Clinton and far to the right of Sanders, but even these proposals are far more realistic and far more progressive than flat or fair tax. A flat tax makes all the rates the same irrespective of income, and the so-called “fair tax” replaces the income tax with a federal sales tax. A federal sales tax is even worse than a flat income tax because the poor spend higher percentages of their incomes than the rich do. This makes a fair tax more regressive than a flat one. In addition, most of the flat tax and fair tax plans leave the rates artificially low such that they could not possibly be revenue neutral. Trump and Bush both have bad plans, but at least their plans are not nearly that awful.